Deck 10: Resource Requirements

Question 1

The goals of users and suppliers of capital may be contradictory.

Answer 1

True

Question 2

One of the goals of valuation is to determine the point of indifference between buying and selling.

Answer 2

True

Question 3

Users of capital are invariably at a disadvantage in dealing with suppliers of capital.

Answer 3

True

Question 4

In the venture capital valuation method, terminal value is found by multiplying terminal net income and the P/E ratio.

Question 5

By staging their capital contributions, venture capitalists preserve the right to abandon a project whose prospects look dim.

Question 6

While follow-on rounds can severely dilute the equity of the founders, early-round investors are insulated from that risk.

Question 7

Staged investments are a method used to manage risk.

Question 8

Investors do not discontinue funding to ventures that are economically viable.

Question 9

By staging capital, the venture capitalists preserve the right to abandon a project whose prospects look dim.

Question 10

Washout financing is a strategy of last resort that wipes out all previously issued stock when existing preferred shareholders will not commit additional funds.

Question 11

The ROR required by a venture capitalist determines the required share of ownership.

Question 12

Vesting is a stock ownership mechanism that limits the number of shares employees are entitled to if they leave the venture prematurely.

Question 13

A cram-down round is an investment round where follow-on investors are compelled by favourable conditions to accept a higher valuation than they would prefer.

Question 14

Share price equals the price paid divided by the number of shares.

Question 15

ROR stands for Rate of Return.

Question 16

Non-compete clauses can impose strong penalties on exiting employees, particularly if their human capital is closely linked to the industry in which the venture is active.

Question 17

The goal of valuation techniques is to be able to arrive at a single number or at least a narrow range of value.

Question 18

A venture investment round that is priced at more than the previous round is referred to as cram-down round.

Question 19

Bargains are defined as economic agreements between at least two parties.

Question 20

Public companies always trade at prices that are consistent with their earnings and sales ratios.

Question 21

How long is the typical expected holding period for an "expansion stage" venture capital investment?

A) 1-3 years
B) 3-5 years
C) 4-7 years
D) 5-10 years
E) More than 10 years

Question 22

What is the formula for calculating a company's market capitalization?

Question 23

Strategic circumference is never an intentional outcome.

Question 24

Why is it important that an entrepreneur understand the capital markets food chain?

Question 25

The First Chicago Method for valuation:

A) employs a lower discount rate, but applies it to an expected cash flow
B) employs a higher discount rate, but applies it to an expected cash flow
C) employs a lower discount rate, but applies it to present value cash flow
D) employs a higher discount rate, but applies it to a present value cash flow
E) None of the answers are correct

Question 26

The Fundamental Method for valuation:

A) is the present value of the future earnings stream
B) is the expected value of future revenue less depreciation and taxes
C) is the present value of income minus expenditures
D) future value of the company at the next stage of investment
E) future value of the company at the final stage of investment

Question 27

Legal documentation spells out the terms, conditions, responsibilities, and rights of the parties to a transaction.

Question 28

What rate of return will a venture capital investor seek from a "first stage" investment?

A) 20-30 percent annual ROR
B) 30-40 percent annual ROR
C) 40-60 percent annual ROR
D) 60-80 percent annual ROR
E) 100+ percent annual ROR

Question 29

How long is the typical expected holding period for a venture capital investment at the "seed stage"?

A) 3-5 years
B) 4-7 years
C) 5-10 years
D) More than 10 years
E) There really is no typical duration

Question 30

What rate of return will a venture capital investor seek from a "turnaround" investment?

A) 20-30 percent annual ROR
B) 50 percent annual ROR
C) 40-60 percent annual ROR
D) 60-80 percent annual ROR
E) 100+ percent annual ROR

Question 31

Far more is negotiable than entrepreneurs think.

Question 32

Under a forced buyout provision, if management does not find a buyer or cannot take the company public by a certain date, then the investors can proceed to find a buyer at terms they agree upon.

Question 33

A successful negotiation is one in which both sides believe they have made a fair deal.

Question 34

There is a cultural attraction to under-the-radar status and smaller size, even when it comes to raising capital.

Question 35

Characteristics of successful deals include all of the following except:

A) they are simple
B) they are robust
C) they are organic
D) they are based primarily on trust rather legal contracts
E) they lock both sides into a journey

Question 36

How long is the typical expected holding period for a "second stage" venture capital investment?

A) 1-3 years
B) 3-5 years
C) 4-7 years
D) 5-10 years
E) More than 10 years

Question 37

Experienced entrepreneurs are able to avoid creating strategic circumference by carefully structuring deals.

Question 38

Entrepreneurs should rely on expert legal and accounting advice to protect them during the deal-making process.

Question 39

What are the three ingredients to an entrepreneurial valuation?

Question 40

According to "principled negotiations" all of the following are true except:

A) People cannot be separated from the situation.
B) Focus on interests not positions.
C) Generate a variety of possibilities before deciding what to do.
D) Insist that the result be based on some objective standard.
E) All of the following are part of principled negotiations.

Question 41

Discuss some of the inherent conflicts that exist between users of capital (entrepreneurs) and suppliers of capital (investors).

Question 42

Identify four traps that an entrepreneur faces in the fund-raising process.

Question 43

A venture capitalist is investing $5 million to acquire 200,000 shares. What is the price per share?

Question 44

Name three factors that can affect the price of an investment deal.

Question 45

When is the best time for an entrepreneur to raise money?